Your retirement years can be some of the most fulfilling and joyful times of your life. With more free time on your hands, you can focus on making memories with family and friends, exploring your hobbies, improving your health, and learning new skills you’ve always wanted to master. To put yourself in the best position to get the most out of your golden years, it’s important to prioritize your personal financial wellness. One of the most important determinants of financial well-being is a healthy credit score.
A credit score is an indication of how responsible you are with credit and takes into account several different factors, including your payment history, credit age, amount owed, and number of accounts.1 Generally, credit scores are ranked between 300-850,2 and higher scores increase your chances of being approved for loans, and often those with more favorable terms.
Credit scores are calculated and compiled by national credit bureaus such as Equifax, Experian, and TransUnion. The guidelines for creditworthiness tend to vary by agency, but in general, the evaluation aligns with these standards:
- Scores of 720 or greater are considered “excellent”
- Scores between 690 and 719 are considered “good”
- Scores between 640 and 689 are considered “fair”
- Scores of 629 or lower are considered “poor”
Though your credit score is important, you should not feel discouraged if your score is currently on the lower end. It is never too late to implement strategies to increase your creditworthiness and boost your score! And this is true even if you are in or approaching retirement and face a fixed or reduced income.
How Does Retirement Affect Your Credit Score?
Because your retirement status and income level are not factored into your credit report, they don’t have a direct impact on your credit score.3 However, during retirement your income level is expected to drop as you begin to tap into Social Security and retirement savings. With less income, your credit score can become more important as you may need to apply to borrow additional funds when large or unexpected bills come your way. Thankfully, there are a number of steps you can take to maintain – and even improve – your credit score during retirement.
- Assess Your Credit Report: In devising a plan for staying on top of your credit score, you first need to have a good idea of where your creditworthiness stands based on your current report. It’s important to stay up to date with your credit score, but always make sure to request information through your bank’s free monitoring service to ensure your score isn’t impacted by checking on it.4 You can also request a copy of your report from Equifax, Experian, and TransUnion or via free websites like Credit Karma. If you’re not sure how to review your credit report, reach out to a trusted financial professional for help.
- Set Up Autopay or Payment Reminders: Staying on top of all of your financial responsibilities can be intimidating, especially if you have several different bills on your plate. A great way to handle all of your payments on time is by setting up autopayments whenever possible, or reminders for upcoming bills so you are never late. Another strategy is creating a central filing system that contains each payment you have to make as well as their due dates.4 It’s essential to keep up with your payments and avoid any late marks on your report, as this is a major factor in determining your credit score. Even with a history of late payments, it is never too late to make improvements, and after a minimum of six months of on time payments you can begin to see your credit score increase.2
- Keep Long-Standing Credit Card Accounts Open: By the time you reach retirement, you’ll likely have credit card accounts that have been open for many years, maybe even decades. One of the factors that goes into your credit score is the age of your credit, with long-standing accounts helping to boost your score.4 Long-standing credit card accounts indicate to lenders that you have a well-established history of making payments on time. And these accounts may have a higher available credit – another contributor to the calculation of your credit score.
- Inquire About Increasing Your Credit Line: A major benefit of having credit card accounts open for a long time is the ability to increase your credit limit over time. If you have an account with a history of on-time payments, you may be eligible to contact your bank and negotiate a higher credit limit for that account.1 In combination with paying down your debt, this can lower your debt utilization rate and therefore lead to an increase in your credit score.
- Determine if Consolidating Your Debts is Right for You: It’s possible that taking out a singular debt consolidation loan to replace numerous individual debts could make your repayment timeline faster and easier.4 With only one payment to make, and possibly a lower interest rate, your debt could be substantially more manageable. Taking steps to deal with your debt now will have significant payoffs down the line! Be sure to consult a trusted advisor before making any major changes to your finances to ensure it’s the right move for you.
- Utilize a Credit Repair Company: If you’re having trouble making substantial improvements on your own, working with a reputable credit repair company may be a good option for you. It’s important to consider whether the services they offer address your needs and are worth the monthly fee. They can be helpful in working directly with the credit bureaus to make a case for improving your score.2
Rome wasn’t built in a day, and nor was your credit score! Changes to your score take place over time, and the rate of this fluctuation can vary based on a number of different factors as well as the specific actions you take along the way. Staying proactive and organized can go a long way towards putting yourself in a great financial position with healthy credit.
As mentioned, retired individuals may face increased financial pressure due to a reduced income. One way to increase your cash flow during retirement is through a reverse mortgage. This type of loan could allow you to draw from your hard-earned home equity and use the funds however you wish, without having to sell the home or make regular monthly mortgage payments (keeping up with property taxes, insurance, and maintenance is required).
The Effect of Credit Scores on Securing a Reverse Mortgage
Unlike a traditional mortgage, with a reverse mortgage your credit score will not play as massive a role in determining your eligibility. Instead, it is entirely possible to get a reverse mortgage with poor credit. Although the loan does consider your credit, a unique feature of reverse mortgages is the optional monthly payments,5 so having a poor credit score will not necessarily disqualify your application.
What about the reverse – will your reverse mortgage affect your credit score? There is no direct impact on your credit score when you secure this type of loan. However, the indirect effect of supplementing your income with reverse mortgage payments is that it could potentially increase your score, or at minimum keep it stable throughout your retirement, so long as you honor the terms of the reverse mortgage.5 Should you choose to utilize funds from a reverse to consolidate other debts, like high-interest credit card balances or medical bills, your credit score could improve over time!
Taking control over your finances in retirement is essential for getting the most out of this beautiful stage in life. And having increased spending power can give you greater peace of mind and allow you to focus on the important people and experiences in your life. If you’re interested in learning more about whether a reverse mortgage is right for you, contact our team at Longbridge today. Getting to know your financial goals and helping you find a solution is our top priority!